April 3, 2013

The Black Swan was White!

The economic crises of 2007 ( aka the great recession ) talks about how the core problem was systematic risk in the credit markets that was invisible due to the need for a coordinated collapse that few thought possible.

Here’s the thing — the Black swan wasn’t black. This Graph, watching home prices in the suburbs of Seattle — says, “The back swan was predictable, thus white. ” What does it say? It says that when home prices went up above the normal appreciation rate of about 6%, they came back down and swung BELOW the normal appreciation rate. They swung up and down around the normal line, and eventually, hit the normal line.

I’ve written this before — inflation alone will bring back the house prices of 2007 in all markets. How long is the question, not if it will happen. I’ll continue to stand by my prediction windows, 2014 +- 2 years for unemployment to return to 5% or so nationally. 18 months after that for house prices to recover in most cities. The black swan wasn’t black — people didn’t bother to do the regressions. The recovery of house prices is no less black. Barring a catastrophe ( say World War 3, nuclear assault, asteroid strike… ). The bad news is — nationally, we won’t see house price recovery to 2007 levels this year. Though, in some hot markets, we might.

The other interesting piece of this analysis — Without the recession, under normal appreciation, house prices would have reached 2007 levels in the last year or two in most markets. Almost all houses should be currently selling for 2007 prices! It’s only the high unemployment keeping prices, and inflation, in check. Once unemployment is gone, all this pent-up inflation will come roaring out. So, if you’ve got the money — buy now. Houses, cars, planes, boats, whatever — as long as it’s REAL capital. BUT — not electronic gadgets, computers, or the like. Moore’s law is one of the few forces bigger than inflation.

The black swan isn’t black, and real capital is discounted right now. This will change.